Navigating Conflicts of Interest: A Decade On from the 2014 FCA Thematic Review

In May 2014, the Financial Conduct Authority (FCA) published the findings of its thematic review “Commercial insurance intermediaries – Conflicts of interest and intermediary” (TR14/9), which shed light on inherent conflicts of interest within the business models of many general insurance intermediaries. Ten years later, conflicts of interest remain a key concern for the regulator. This article outlines how intermediaries can align with the FCA's expectations, ensure compliance with regulation, and treat customers fairly.

FCA Expectations for Insurance Intermediaries

The FCA mandates that intermediaries must avoid remuneration practices that could unduly influence recommendations against customers’ best interests or lead to improper performance of their duties to the customer. Following its December 2017 Final Notice in relation to Bluefin Insurance Services, the FCA reinforced the need for intermediaries to establish comprehensive written conflicts of interest policies, train staff on how to manage conflicts of interest fairly, and implement robust review systems and monitoring controls. Records of identified and managed conflicts should be meticulously maintained to demonstrate compliance.

Key Issues for Firms to Consider

Given that most intermediaries are likely to be operating one or more of the business scenarios outlined in the 2014 report, it is essential that firms consider the regulator’s concerns and review processes to ensure they withstand scrutiny. Below are some of key issues for firms to consider:

Business Structure and Revenue Sources

Given that firms fulfil multiple roles in the distribution chain and intermediaries often act as agent for both the customer and insurer in the same transaction, to mitigate conflicts firms should consistently segregate revenue information and implement 'Chinese walls' to maintain clear operational boundaries.

Management and Control Frameworks

Firms should tailor control frameworks and management information (MI) to their business's size and complexity and MI should be of an adequate scope and quality to enable effective monitoring and conflict mitigation. This includes understanding and recording the distribution channels used (e.g., open market broking, panel of insurers) and instances where intermediaries acted in dual or mixed agency capacities.

Additionally, gifts and hospitality should be carefully managed, and the rationale for an intermediary recommending a particular insurer must be consistently documented on customer files.

Remuneration and Incentives

Firms should consider and mitigate instances where incentives could lead to the interests of one client or group of clients being favoured over the other and ensure that remuneration arrangements do not conflict with a firm’s duty to act in the best interests of customers.

Disclosure

Disclosures should be clear, fair, not misleading, and remuneration scenarios should be placed to allow proper understanding. Firms must clearly disclose potential conflicts of interest, especially when part of a larger group involving insurers or brokers.

Customer Understanding

Intermediaries should ensure customers are fully aware of the intermediary’s role, including whether the intermediary is acting on behalf of the customer. Consider what percentage of your customers you act as agent for, whether they know when you act as the agent of the insurer, and whether you have checked this understanding.

Claims Handling

The risk of harm is increased where firms managing claims are incentivised to achieve a particular loss ratio, and appropriate controls should be put in place to mitigate this. Firms outsourcing claims handling must identify and fairly manage potential conflicts of interest with third-party providers. 

Sources of Business – Appointed Representatives (ARs)

Previously, the FCA found that some Principals did not identify or record obvious conflicts on their conflicts of interest register. The FCA has also expressed concern that some Principals refer to their ARs as ‘clients’, rather than ARs for which they hold regulatory responsibility. Principals must accurately record conflicts of interest involving ARs and ensure management information focuses on conduct rather than just commercial arrangements.

Add-On Insurances and Premium Finance

Firms should adhere to clear pricing structures for add-on products and ensure these structures are consistently applied. Consideration of the customer suitability and compatibility with products must also be evidenced.

Where there is an incentive to use a particular premium finance provider, customers may not be offered cheaper premium finance alternatives; firms must mitigate conflicts in premium finance arrangements, ensuring transparency and fairness in offered rates and finance options.

Insurance Costs Borne by Another Party

Firms should consider how to evidence that commission rates are comparable with similar products offered to customers paying their own premiums and how to demonstrate that commissions shared with other parties represents ‘fair value’ for all involved, including leaseholders/tenants likely to pay for the insurance.

Moving Forward

A decade after the FCA’s initial thematic review, conflicts of interest continue to be a pivotal issue in insurance intermediation. Firms must maintain a vigilant, proactive approach to managing conflicts, ensuring they meet regulatory expectations and treat customers fairly. In doing so, intermediaries can both comply with the FCA’s guidelines and enhance reputational integrity and boost customer trust.

About the author

Rebecca recently joined us in 2024 as a Senior Content Writer and has experience researching and creating multimedia content. With a keen interest in current and emerging industry affairs, Rebecca responds through a critical lens and, by promoting thought and discussion, aims to increase awareness of UKGI’s work.

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